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How the Brexit Outcome Impacts Institutional Investors

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Michael Maduell, President of the Sovereign Wealth Fund Institute

Michael Maduell, President of the Sovereign Wealth Fund Institute

The United Kingdom’s choice to exit the European Union, combined with U.K. Prime Minister David Cameron resigning, and a plummeting pound sterling down at a 31-year low, sets the stage for potential opportunity for wealth funds and pension investors. JPMorgan Chase CEO Jamie Dimon sent a memo telling that foreign exchange volumes were at a record on Thursday night. The memo stated, “We remained totally open and accessible on e-trading channels overnight and processed 1,000 trading tickets per second at one point.”

This historic time in U.K. history, in which voters, at 72.2% turnout, tallying “Leave” totaled 17,410,742 versus “Remain” at 16,141,241, does put the concept of the European Union at risk. Cameron’s successor will be tasked to invoke Article 50 of the EU Treaty of Lisbon. Other political figures within the EU have called for an exit, such as in Italy and the Netherlands. Furthermore, pollsters, pundits, prediction markets and politicians greatly miscalculated the referendum vote of Britain exiting the EU. This makes the job of a chief investment officer even more challenging. Whose opinion really matters? Are pundits telegraphing what they want to happen versus what is really going to happen?

Long-Term Institutional Investors

Remember, large pensions and sovereign wealth funds are long-term institutional investors with perpetual-like time horizons. These pools of patient capital have billions upon billions invested throughout Europe. In a recent McKinsey report, “From big to great: The world’s leading institutional investors forge ahead,” a key finding included more asset owners hiring portfolio construction specialists. Asset owners that can develop house views, may have an edge as the concept of analyzing economic scenarios is paramount to the success of wealth fund returns. Sovereign investors such as GIC Private Limited have internal resources and have been looking at a Brexit scenario for over a year.

According to data from the Sovereign Wealth Fund Transaction Database, sovereign funds directly invested US$ 17.85 billion in 2014 and US$ 29.41 billion in 2015 into the United Kingdom. What I find fascinating is that several cash-rich pensions and wealth funds are maintaining a positive tone when it comes to allocating more capital to Britain, while voicing some concern about risk spreading throughout the eurozone. According to the Statistisches Bundesamt, Germany exported €89,288,118,000 worth of goods and services to the United Kingdom in 2015. On the other hand, the United Kingdom exported €38,324,475,000 worth of goods and services to Germany. Does Germany or the U.K. have economic leverage in this picture? Will the U.K. have weaker access to EU markets, or will the U.K. be able to compete with less regulations? Bottomline, Germany, France, and Spain for that matter want the U.K. to exit quickly to avoid further contagion and reduce economic uncertainty (a word that I dislike using). Thus, bond market specialists could see less-resilient economies in the EU experience bond spreads likely widening.

The Optimists

Many sovereign wealth funds have skin in London, choosing to operate their European headquarters in the city. Norway’s Government Pension Fund Global (GPFG), made it publicly-known they will remain a long-term institutional investor in the U.K. regardless of the Brexit outcome. Another large asset owner, the Canada Pension Plan Investment Board, one of the most active public institutional investors, mentioned positive prospects when it comes to investing on the U.K. referendum decision. A CPPIB spokesperson told Reuters on Friday that, “As any investor, we have a bias to stability over uncertainty, yet periods of dislocation can present compelling opportunities that short-term investors are unable to pursue.”

In the end, for some asset owners, they believe outsized returns are possible when excess fear and panic hit markets.

The views in this article are expressed by Michael Maduell.
Michael Maduell is President of the SWFI.
www.swfinstitute.org

Saudi Aramco Contemplates SABIC Stake from PIF

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Oil giant Saudi Aramco is in early discussions on whether to pursue an ownership stake in Saudi Basic Industries Corporation (SABIC) from the Public Investment Fund (PIF). At the moment, Saudi Aramco has no plans to buy publicly-held shares of SABIC. SABIC was founded in 1976 by Saudi royal decree to convert oil by-products into useful chemicals, polymers, and fertilizers.

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SWFI First Read, July 19, 2018

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GIC Eyes Provenance Land

GIC Private Limited is nearing a deal to purchase up to 50% of Provenance Land. Provenance Land owns India’s first Four Seasons hotel.

Eduard van Gelderen Leaves UC Regents for PSP Investments CIO Role

Eduard van Gelderen exited his position as Senior Managing Director at the University of California Regents’ Office of the Chief Investment Officer. His role will not be replaced. He accepted an offer to be Chief Investment Officer of the Public Sector Pension Investment Board (PSP Investments).

PAAMCO Prisma Holdings CEOs to Exit

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Google Fined Big Time by EU Regarding Antitrust Violations

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The European Union (EU), through its competition commissioner, levied a €4.34 billion fine against Alphabet Inc., the owner of Google. The fine is over Google having “imposed illegal restrictions on Android device manufacturers and mobile network operators to cement its dominant position in general internet search,” according to the European Commission (EC).

The European Commission is requiring Alphabet to cease from its conduct that it is accused of within 90 days or face penalty payments of up to 5% of the average daily worldwide turnover of Alphabet, Google’s parent company.

Commissioner Margrethe Vestager, in charge of competition policy, said in a press release, “Today, mobile internet makes up more than half of global internet traffic. It has changed the lives of millions of Europeans. Our case is about three types of restrictions that Google has imposed on Android device manufacturers and network operators to ensure that traffic on Android devices goes to the Google search engine. In this way, Google has used Android as a vehicle to cement the dominance of its search engine. These practices have denied rivals the chance to innovate and compete on the merits. They have denied European consumers the benefits of effective competition in the important mobile sphere. This is illegal under EU antitrust rules.”

The EC press release added, “In particular, Google: 1. has required manufacturers to pre-install the Google Search app and browser app (Chrome), as a condition for licensing Google’s app store (the Play Store); 2. made payments to certain large manufacturers and mobile network operators on condition that they exclusively pre-installed the Google Search app on their devices; and 3. has prevented manufacturers wishing to pre-install Google apps from selling even a single smart mobile device running on alternative versions of Android that were not approved by Google (so-called “Android forks”).”

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